THE PLANK MARCH 24, 2009
Simon Johnson is a professor at MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is co-founder of the global economy website, BaselineScenario.com.
The administration’s media rollout of the Geithner Plan was as meticulously coordinated as a Super Bowl Sunday. In future courses for doctors of spin, there will be a special session on the administration's dogged attempt to get everyone together and work every segment of its increasingly fragmented viewership. Calls were even made to economic bloggers to “give Tim a chance.”
But economics is a much tougher business than football. A big market jump on Monday is not victory, and you don’t get to go home after breaking the record for collective charisma points earned in a 24-hour period. Instead, you start to face the difficult and more technical questions (which don’t always fit the format of Sunday talk shows). Is there really a master plan? Something consistent with the administration’s principles could look like this:
1. Announce the toxic assets purchase plan.
2. In the new budget, obtain the money needed for recapitalizing banks--so that once banks sell bad assets and recognize losses, they can get new capital from the government.
3. Announce stress tests (i.e., evaluations of what banks’ balance sheets will look like if the economy remains in trouble) that are tough on banks--this will force them to raise capital and sell assets, otherwise they will sit on the stuff for years.
4. Use the budget money to recapitalize banks as needed using preference shares. This is a way to put in taxpayer money while preventing the government from taking majority ownership (and the administration feels strongly about this; I’ve asked).
5. Make sure to get the toxic assets off banks’ balance sheets at the new, low, reasonable prices.
So far, the administration has stopped at point 1. Unless there is a somewhat miraculous end of the credit crunch, this is almost certainly not enough. That's why the Geithner plan feels more like political maneuvering ahead of the G20 summit next week and a way to maintain the impression of progress rather than a real, long-term plan.
There is nothing wrong with hoping that the Geithner plan works, of course. But for me to believe that we're approaching anything close to a solution, I’d need to see the administration be tough on banks--the stress tests in point 3 above are crucial--and Monday's announcement was instead very nice to bankers.